Malaysia’s Apr-15 palm oil stocks climbed 18% MoM to 2.19m MT, exceeding both consensus (2.13m MT) and our forecast (1.93m MT) by 3% and 14%, respectively. This was due to a continued surge in CPO production (+13% to 1.69m MT), while exports disappointed (-1% to 1.18m MT). We think production is likely to rise 7% to 1.81m MT in May, in line with seasonal patterns. Meanwhile, we expect exports to rise 26% to 1.48m MT on lower export taxes in Malaysia and stocking up activity ahead of Ramadan. Overall, May-15 closing stocks could still rise 6% to 2.33m MT. Looking ahead, the recent trend of rising crude oil prices amid flattish CPO prices, combined with a better biodiesel subsidy outlook from Indonesia could improve biodiesel producers’ outlook. However, with the upcoming 1Q15 earnings season likely to see more misses than hits, planters’ upside could be limited in the near-term. Reiterate NEUTRAL as CPO prices are likely to stay range-bound between RM2,100-RM2,300/MT. However, share price downside is also limited as the subdued CPO outlook is already priced in. Maintain OUTPERFORM on TAANN (TP: RM4.44) and CBIP (TP: RM2.46), MARKET PERFORM on PPB (TP: RM16.00), FGV (TP: RM2.21), IJMPLNT (TP: RM3.57), TSH (TP: RM2.30) and UMCCA (TP: RM6.61). Maintain UNDERPERFORM on IOICORP (TP: RM4.40), KLK (TP: RM20.34), and GENP (TP: RM9.57), and UNDER REVIEW call/TP on SIME.

Apr-15 stocks of 2.19m MT higher than expected. Ending inventory in Apr-15 exceeded both consensus (2.13m MT) and our expectations (1.93m MT) by 3% and 14%, respectively. This was due to a continued surge in CPO production (+13% to 1.69m MT), exceeding consensus (+12%) and our forecast (+2%). Exports performance also disappointed (-1% to 1.18m MT) against consensus (+3%) and our forecast (+6%).

Headed for production mini-peak in May. Apr-15 production showed a strong recovery at +13% to 1.69m MT, the highest production seen since Nov-15. Going forward, we expect May-15 production to rise 7% to 1.81m MT, in line with the seasonal production patterns. Note that Malaysian production historically sees a mini-peak in May before the annual production peak season in Aug-Nov.

Attractive export tax regime and Ramadan to drive export growth. Exports flat-lined in Apr-15 at 1.18m MT, which could be due to: (i) reduced selling in Malaysia in anticipation of a more attractive export regime in May, as well as (ii) higher sales in Indonesia ahead of the USD50/MT CPO levy to be imposed in May. We believe the situation is set to reverse this month, which should lead to stronger CPO exports from Malaysia. Furthermore, stocking up activity leading up to Ramadan should bolster exports, as we observe that exports rose at a 10-year average of 4% in the month before Ramadan. Therefore, we expect May-15 exports to rise 26% to 1.48m MT, which is +2.0SD above the May average export growth of 4%.

May-15 inventory to rise 6% to 2.33m MT. We expect supply at 1.87m MT to exceed demand of 1.73m MT. On the supply side, we think production should improve 7% in line with the seasonal trend. Meanwhile, on the demand side, we expect exports to rise 26% due to lower export taxes in Malaysia and stocking up ahead of Ramadan. Hence we forecast May-15 inventory to continue rising, by 6% to 2.33m MT.

Greener future for biodiesel? In recent weeks, crude oil prices have strengthened to ca.USD65/barrel (ca.USD480/MT) while gasoil prices traded at the USD600/MT mark. Meanwhile, CPO prices have hovered around USD600/MT. Should this price trend continue, we think biodiesel producers may benefit from both higher oil prices and the impending biodiesel subsidy programme expansion from Indonesia. Potential beneficiaries from this trend include PPB (MP; TP: RM16.00) through its associate Wilmar, KLK (UP; TP: RM20.34), SIME (UNDER REVIEW), FGV (MP; TP: RM2.21) and GENP (UP; TP: RM9.57). However, we expect a weak 1Q15 earnings season. We think the coming 1Q15 reporting season is likely to see more misses than hits for two reasons. Firstly, 1Q15 CPO price at RM2,263/MT was lower YoY by 16% and higher QOQ by only 3%. Secondly, 1Q15 Malaysia CPO production at 3.78m MT was lower both YoY (-12%) and QoQ (-25%). We expect the poorer earnings outlook to keep upside limited for planters, with the greatest seasonal earnings risk in pure planters such as IJMPLNT (MP; TP: RM3.57), TSH (MP, TP: RM2.30) and UMCCA (MP; TP: RM6.61).

Reiterate NEUTRAL as CPO prices to stay range-bound in the near-term. Although we foresee a brighter demand outlook due to rising food demand and a potential biodiesel catalyst, we think prices could remain under pressure due to buoyant supplies of both CPO and soybean oil. Therefore, we reiterate our NEUTRAL call on the Plantation sector with an unchanged FY15E CPO forecast at RM2,200/MT and expect trading to remain range-bound between RM2,100-RM2,300/MT in the near term. Nevertheless, we think the downside is limited as well due to depressed valuations, which have well priced in the subdued CPO price outlook. 

Source: Kenanga Research - 12 May 2015